Foreign aid and economic growth: The role of flexible labor supply

This paper examines the link between foreign aid, economic growth, and welfare in a small open economy. External transfers impinge on the recipient's macroeconomic performance by affecting resource allocation decisions and relative prices. The endogeneity of the labor–leisure choice plays a cru...

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Bibliographic Details
Published in:Journal of development economics 2007-09, Vol.84 (1), p.507-533
Main Authors: Chatterjee, Santanu, Turnovsky, Stephen J.
Format: Article
Language:English
Subjects:
Correlation analysis
Economic growth
Endogenous labor
Flexibility
Foreign aid
International transfers
Labor supply
Labour supply
Public investment
Studies
Welfare economics
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Summary:This paper examines the link between foreign aid, economic growth, and welfare in a small open economy. External transfers impinge on the recipient's macroeconomic performance by affecting resource allocation decisions and relative prices. The endogeneity of the labor–leisure choice plays a crucial role in the propagation of foreign aid shocks. The efficacy of foreign aid also depends on externalities associated with the public good that it helps finance. The impact of tied and untied aid on the recipient government's intertemporal fiscal balance is examined. Finally, the transitional adjustment to a foreign aid shock is shown to be sensitive to the elasticity of substitution in production and the relative importance of the labor–leisure choice in utility.
ISSN:0304-3878
1872-6089
DOI:10.1016/j.jdeveco.2006.03.001